Bernanke warns of Audit the Fed’s political implications

Anticipating a possible Jan. 12, 2016, vote on the Federal Reserve Transparency Act of 2015, a Brookings Institution blog post by Ben Bernanke warns that the measure “raises serious concerns about Fed independence and the integrity of the process for making monetary policy.” The bill, S. 2232, also known as “Audit the Fed,” was most recently introduced in January 2015 by Sen. Rand Paul (R-Ky) (see Banking and Finance Law Daily, Jan. 29, 2015).

Bernanke, former Federal Reserve Board Chairman, claims that the Fed is already “thoroughly audited in the usual sense,” and that S. 2232 would “increase the likelihood” of political interventions in monetary policy.

Current audit procedures. Bernanke’s blog post details the audit procedures already in place. The Fed is audited by an independent inspector general and by an outside accounting firm (currently, Deloitte and Touche), and the resulting financial reports are made public online. Every security owned by the Fed is also available online. Moreover, the Government Accountability Office, which does in-depth reviews and analyses at the request of Congress, “has wide latitude to review Fed operations,” Bernanke writes, including supervision and regulation as well as other functions. For example, Bernanke adds, as required by the Dodd-Frank Act, the GAO conducted reviews of the Fed’s emergency lending programs during the crisis and of the Fed’s governance structure. Since the financial crisis, he says, the GAO has done “some 70 reviews of aspects of Fed operations.”

Role of Congress. Bernanke agrees that effective Congressional oversight of the Fed is essential; however, it involves some “complex tradeoffs.” On the one hand, Bernanke writes, Congress has the ultimate responsibility of assuring itself and the public that monetary policy is being conducted reasonably and in the national interest. On the other hand, institutionally, Congress is “not well-suited” to make monetary policy decisions itself, because of the technical and time-sensitive nature of those decisions.

Goal of transparency and accountability. According to Bernanke, the Fed should continue to strive to improve its transparency and accountability, and in particular to ensure that Congress has all the information it needs to fulfill its oversight responsibilities. However, he cautions that this goal is not best achieved by “overturning longstanding practice and effectively inserting Congress and the GAO into monetary policy decisions, calling into question the Fed’s independence.” This, Bernanke warns, would provide a vehicle for members of Congress to apply political pressure on the Fed.

Result of political interventions. Bernanke acknowledges that the Fed makes mistakes, “sometimes big ones.” However, he says that monetary policy is complex and must be conducted under tremendous uncertainty about both the economic outlook and how the economy works. Nevertheless, Bernanke expresses certainty, “from first-hand experience,” that the Federal Open Market Committee sets monetary policy with the best technical information available and without any consideration of politics or partisanship. He is also certain that “political interventions in monetary policy decisions would not lead to better results.” However, he warns, “increasing the likelihood of such interventions is precisely the risk presented by Audit the Fed.”